SALT Blawg – State and Local Tax Blog
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by Stewart Weintraub and Jennifer Weidler
On June 1, the Performance Marketing Association ("PMA"), a trade association founded to connect, inform and advocate on behalf of performance marketing, filed suit against the Illinois Department of Revenue challenging the validity of the State's recently enacted Amazon law. The law at issue, House Bill 3659 ("Bill"), requires certain out-of-state retailers to collect sales tax if they maintain affiliates within the state who advertise, via Websites, on the out-of-state company's behalf. The complaint alleges that the Bill violates the Commerce Clause by imposing sales tax collection obligations upon retailers who do not have a substantial nexus with the state. Furthermore, the complaint alleges that theIllinoislaw violates the federal Internet Tax Freedom Act by discriminating against Internet-based performance marketing.
The PMA claims that the Illinois law persecutes Illinois small-business owners who publish online advertisements for out-of-state retailers. As a result of the passage of the Bill, Amazon.com and similar companies severed their affiliate connections within the State. The PMA reports thatIllinoisaffiliates will lose 25-35% of their revenue as a result of retailers cutting ties to avoid the sales tax obligation. Furthermore, the PMA states that there are approximately 9,000 Website operators inIllinoisacting as affiliates, and generating $744 million in advertising revenue.
One of the questions raised by the litigation, as well as by the out-of-state online retailers' response to the various states that have enacted Amazon laws, is whether these Amazon laws are having their desired effect. While states have enacted the laws in an attempt to expand their taxing authority and reach, and therefore revenue, the result may likely be a decline of income tax collections without a corresponding increase of sales tax collections. Responding to a state's enactment of the new "Amazon" legislation, Amazon.com, Overstock.com and like organizations are terminating their affiliate programs and are disassociating themselves from their affiliates within that state. Thus, contrary to legislative intent, additional revenue is not generated from the passage of the Amazon laws. Moreover, the states may actually lose money as a result of the Amazon laws, since state income tax that was collected from in-state affiliates may be diminished. ForIllinois, estimates are that it could result in a loss of up to $22 million from affiliate-based state income tax revenue.
ShareholderStewart Weintraub’s practice has centered on taxation for more than 40 years. He helps clients plan and structure transactions so that all state and local tax obligations are minimized. He represents clients in all aspects of ...